Dependence of stock and commodity futures markets in China: implications for portfolio investment

In this article, we examine the recent trends in dependence structure between the fast-growing commodity markets and the stock markets in China in order to draw implications for portfolio investment. We address this issue by using copula functions that allow for measuring both average and tail dependence. Our results provide evidence of small and positive correlations between these markets, suggesting that commodity futures are a desirable asset class for portfolio diversification. By comparing the market risks of alternative portfolio strategies, we show that Chinese investors can take advantage of commodity futures to obtain risk diversification and downside risk reduction benefits.